Updated Mar 15, 2022 - Economy

The world economy depends on geopolitics

Illustration of a globe breaking and rolling away.

Illustration: Aïda Amer/Axios

A sense that the world is coming unglued — and that great-power geopolitics will ultimately shape economic destiny — hangs over global markets and the economy.

The big picture: Aspects of how the world works that people have taken for granted for a generation have become deeply uncertain amid war in Europe, new pandemic lockdowns in China and high inflation in the U.S. that global developments stand to make worse.

The threats are to globalization itself, and specifically the assumption that even countries that have big disagreements can do business with each other on an ever-widening scale.

  • At the same time, the faster and more efficient supply chains that companies have built over the course of decades are crumbling in new ways.

Driving the news: Over the weekend China announced a one-week lockdown of Shenzhen, an industrial powerhouse region that produces goods crucial to many global supply chains, due to a spike in COVID cases.

  • The shutdown is just the latest hit, at a time when war and sanctions are already straining supplies of commodities.

State of play: In effect, a collision is underway between powerful geopolitical and economic forces of a sort that are creating rapid whipsawing effects in markets as traders and policymakers try to make sense of this rapidly changing world.

  • The Russian invasion of Ukraine has caused spiking prices for oil, wheat, and many metals on commodity markets (though those prices pulled back some on Monday), as the productive capacity of two large countries is essentially cut off from the rest of the global economy
  • There were reports that Russia has asked China for military assistance, which, if honored, would raise the possibility of the economic schism between Russia and the West expanding to include the world's second-largest economy most populous nation.

Put it all together, and the economic outlook is messy. Monday's market shifts reflected this unsettling time, with some surprising moves.

  • Treasury bond yields soared to their highest levels since 2019 — contrary to the usual pattern in which times of crisis cause people to pour money into ultra-safe bonds, driving their yields downward. It's a sign that global investors are not counting on global uncertainty to bring about cheaper money like in the past.
  • Oil actually fell sharply, with West Texas Intermediate crude down 6.7% to a bit over $102 a barrel. This is welcome news for energy consumers, but the reason is less reassuring—it appears to be driven in part by expectations that Chinese lockdowns will depress demand.
  • Chinese stocks fell precipitously, with the Hang Seng index off nearly 5%. It reflected fears of both further lockdowns and possible further Chinese entanglement with Russia.

The bottom line: The thing about living through momentous times in history is you don't know how things are going to end. Markets, and all of us, are just trying to make sense of it in real time.

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